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Monetary policy responses to oil price fluctuations

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  • Bodenstein, Martin
  • Guerrieri, Luca
  • Kilian, Lutz

Abstract

The recent volatility in global commodity prices and in the price of oil, in particular, has created renewed interest in the question of how monetary policy makers should respond to oil price fluctuations. In this paper, we discuss why this question is ill-posed and has no general answer. The central message of our analysis is that the best central bank policy response to oil price fluctuations depends on why the price of crude oil has changed. For example, an unexpected oil supply disruption in the Middle East calls for a different policy response than an unexpected increase in Chinese productivity or oil intensity. This means that policy makers need to disentangle the structural shocks that are jointly driving the price of oil and the macroeconomy and tailor their response to the observed mix of shocks. We use a multi-country DSGE model to quantify the appropriate policy responses and to analyze the optimal responses from a welfare point of view. We also reexamine the welfare gains from global monetary policy coordination in a world with trade in oil.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8928.

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Date of creation: Apr 2012
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Handle: RePEc:cpr:ceprdp:8928

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Keywords: endogeneity; global economy; monetary policy; oil price; open economy; policy rule; welfare;

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Cited by:
  1. Samuel Wills, 2014. "Optimal Monetary Responses to Oil Discoveries," OxCarre Working Papers 121, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Ratti, Ronald A & Vespignani, Joaquin L., 2012. "Crude Oil Prices and Liquidity, the BRIC and G3 countries," Working Papers 15727, University of Tasmania, School of Economics and Finance, revised 17 Dec 2012.
  3. Leung, Charles Ka Yui & Shi, Song & Ho Tang, Edward Chi, 2013. "Commodity house prices," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 875-887.
  4. Ratti, Ronald A. & Vespignani, Joaquin L., 2012. "Liquidity and Crude Oil Prices: China’s Influence Over 1996-2011," MPRA Paper 48900, University Library of Munich, Germany.
  5. Martin Stürmer, 2013. "150 Years of Boom and Bust: What Drives Mineral Commodity Prices?," 2013 Papers pst529, Job Market Papers.
  6. Ano Sujithan, Kuhanathan & Koliai, Lyes & Avouyi-Dovi, Sanvi, 2013. "Does Monetary Policy Respond to Commodity Price Shocks?," Economics Papers from University Paris Dauphine 123456789/11718, Paris Dauphine University.
  7. Rick Van der Ploeg & Samuel Wills & Ton van den Bremer, 2013. "The Elephant in the Ground: Managing Oil and Sovereign Wealth," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
  8. Eickmeier, Sandra & Lombardi, Marco J., 2012. "Monetary policy and the oil futures market," Discussion Papers 35/2012, Deutsche Bundesbank, Research Centre.
  9. Barbara Rossi, 2012. "The changing relationship between commodity prices and equity prices in commodity exporting," Economics Working Papers 1405, Department of Economics and Business, Universitat Pompeu Fabra.

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